Loan collateral decisions and corporate borrowing costs

James R. Booth, Lena Chua Booth

    Research output: Contribution to journalArticlepeer-review

    49 Scopus citations

    Abstract

    We examine the relation between borrowing costs and the presence of loan collateral. We find the presence of collateral increases with default risk, consistent with low quality borrowers reducing their risks and borrowing costs through the use of collateral. By explicitly controlling for the interdependence between the decision to pledge collateral and borrowing costs, we find that secured loans have predicted spreads substantially lower than if they had been made on an unsecured basis. Alternatively, loans made on an unsecured basis have spreads not substantially different from if they had been secured. The evidence suggests that collateral pledging decisions are generally consistent with borrowing cost minimization.

    Original languageEnglish (US)
    Pages (from-to)67-90
    Number of pages24
    JournalJournal of Money, Credit and Banking
    Volume38
    Issue number1
    DOIs
    StatePublished - Feb 1 2006

    Keywords

    • Borrowing costs
    • Costly contracting
    • Cross-monitoring
    • Generalized bank monitoring
    • Loan collateral
    • Selectivity bias

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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